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What Drove Lululemon’s 1Q17 Margins?

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Evaluating Lululemon Athletica’s 1Q17 earnings performance

Lululemon Athletica (LULU) reported a 6.7% YoY (year-over-year) increase in its earnings per share (or EPS) to $0.32. This was $0.04 more than analyst expectations and also higher than the upper end of its management’s earnings guidance of $0.25–$0.27.

While discussing the company’s 1Q17 performance, Laurent Potdevin, CEO of Lululemon, commented, “From our cadence of product innovation, to our enhanced digital experience, and first-ever global brand campaign, we have never felt more deeply connected to our guest or better positioned to expand our collective. We remain laser focused on owning our position as the global brand defining an active, mindful lifestyle.”

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Gross margin continues the improvement

Lululemon’s (LULU) gross margin improved 112 basis points to 49.4% of sales. This benefit was largely driven by operational efficiency in its supply chain processes. Adversely impacting the margins was a reduction of 100 basis points resulting from the Ivivva inventory provisions.

Lululemon’s gross margin has improved for the last four straight quarters. The company’s strategic supply chain efforts related to sourcing and logistic structure upgrades have been behind the continuous improvement.

As a result, the company posts higher margins than its sportswear peers. Its trailing-12-month gross margin stood at 51% compared to 45% for Nike (NKE), 46.3% for Under Armour (UAA), and 46.8% for Columbia Sportswear (COLM).

A look at the operating margin

Lululemon’s (LULU) adjusted operating margin expanded 50 basis points to 12.1% of sales. Its SG&A[1. selling, general, and administrative expenses] expenses increased to 38.3% of sales compared to 36.6% in 1Q16.

The closure of the Ivivva stores resulted in $17.7 million of pre-tax charges and reduced the operating margin to 8.7% of sales. You can read about the company’s decision to close a large part of its Ivivva business in the next article.

ETF investors seeking to add exposure to LULU can consider the PowerShares Russell Midcap Pure Growth Portfolio ETF (PXMG), which invests 0.8% of its portfolio in LULU.

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